Inside Markets — Bond Yields

Today’s backup in yields is mostly attributed to the pricing of election uncertainty. Recall last Thursday’s note on the increased price of MOVE Index (bond volatility) options. An election premium also shows up the pricing of swaptions with a November expiration. In this case, the ‘election uncertainty’ is increased probability for a sweep outcome. Markets usually prefer divided government election results because it generally produces a more narrow range of policy outcomes. A sweep election result increases the likelihood of more fiscal stimulus, which would likely re-accelerate inflation and reduce the amount of Fed rate cuts currently priced in the forward OIS curve.

More: Ten-year Treasuries have reached oversold levels that match those from a year ago when yields topped out near 5%. Extreme oversold conditions increase the likelihood that 10-year yields retrace to 3.82-3.92% range in the near term. The pricing for a spike in bond market volatility that’s already occurred in index and swaptions markets should also act as a pressure relief valve in the weeks ahead.

In addition to flash PMIs on Thursday, markets are looking forward to a busy week of earnings reports. The industrials and materials sectors will be prominently featured with 40% and 30% of companies set to report, respectively. Earning highlights with meaningful readthroughs this week include TXN (semiconductors), KO (consumer trends), VRT (datacenter builds), and TSLA (first of Mag 7).

Last Friday was the peak in the US corporate blackout window with the dynamic beginning to roll off this week. Corporate buybacks have been the largest net buyer of US equities this year and the rolling end of the blackout window should be a bullish near-term technical development. Fund flows generally remain supportive for a post-election equity rally into year-end.